Wall Street’s S&P 500 fell 3.4 percent, while the Nasdaq Composite, which is dominated by technology stocks that are more sensitive to interest rate expectations, fell 3.9 percent. It was the biggest daily decline for both indexes since mid-June. Europe’s regional Stoxx 600 stock index lost 1.7%. Speaking in Jackson Hole, Wyoming, Powell said the Fed “has to keep it until the job is done,” underscoring the U.S. central bank’s determination to tame rapid price growth. The Fed is battling the sharpest rise in consumer prices in nearly four decades, with annual inflation reaching 8.5% in July. But policymakers are also trying to avoid tipping the world’s largest economy into recession with their plan for aggressive rate hikes. “[Powell] is pushing against the idea of raising rates and cutting them short,” said Stewart Robertson, chief economist at Aviva Investors. “I think this is the first sign of Powell saying ‘we’re going to have a bad period and we have to have it.’ Market pricing on Friday showed investors expected the Fed to raise interest rates to 3.8% by February 2023, up from expectations of 3.3% earlier this month. The current target range for the benchmark federal funds rate is 2.25 percent to 2.50 percent. “The implications for the equity market are that earlier expectations of a Fed pivot look premature and therefore the short-term direction could be a reversal of the summer rally. Ultimately, these higher interest rates and the further economic slowdown will weigh on corporate earnings later this year,” said Janet Mui, head of market analysis at Brewin Dolphin Wealth Management. According to Robertson, the US Treasury bond markets accepted Powell’s speech. The yield on the two-year Treasury note, which closely tracks interest rate expectations, rose 0.01 percentage points to 3.38%. The yield on the 10-year bond, which is more sensitive to economic growth expectations, was flat at 3.03%. Forecasts for tighter policy and higher borrowing costs have already begun to weigh on investor sentiment in corporate debt markets. The yield spread between high-yield U.S. corporate bonds and ultra-low-risk government debt has widened in recent weeks, widening from 4.2 percentage points on Aug. 11 to 4.6 percentage points at the close of trading on Thursday, according to Ice Data Service index. Junk bond funds recorded outflows of $4.8 billion in the week to Wednesday, the biggest buying in nine weeks, according to EPFR data compiled by Bank of America. Elsewhere, the European Central Bank is widely expected to raise interest rates by half a percentage point for the second time in a row at its next policy meeting on September 8. Some policymakers are pushing for the ECB to consider a more aggressive move to raise interest rates by 0.75 percentage points amid fears of a spike in energy prices that have already pushed euro zone inflation to a record high, according to a Reuters report. The ECB declined to comment. However, no decision has been made on whether such a move will be discussed at next month’s meeting, and that may depend on whether inflation continues to beat expectations when the latest data is released on Wednesday. The ECB raised borrowing costs by 0.5 percentage points to zero last month. The yield on Italy’s 10-year bond jumped 0.19 percentage points to 3.72 percent, reflecting a sharp drop in price as investors weighed the potential impact of higher borrowing costs on Europe’s weaker economies. Germany’s equivalent yield added 0.08 percentage point to 1.40 percent, while the policy-sensitive two-year Bund yield added 0.11 percentage point. Additional reporting by Martin Arnold in Frankfurt
